The Tax Foundation is the nation’s leading independent tax policy nonprofit. Since 1937, our principled research, insightful analysis, and engaged experts have informed smarter tax policy at the federal, state, and global levels. For over 80 years, our goal has remained the same: to improve lives through tax policies that lead to greater economic growth and opportunity.

A Good Excise Tax

April 6, 2020

Ulrik Boesen

Ulrik Boesen

On March 19, Secretary of the Interior David Bernhardt announced that the U.S. Fish and Wildlife Service will distribute almost $1 billion to state and territorial fish and wildlife agencies to fund conservation and recreation projects. These funds have been raised through a rather well-designed excise tax levied on firearms as well as hunting and fishing equipment. The specific figures for the states can be seen in the table at the end of this piece.

The excise tax on firearms was established under the National Firearms Act in 1937, though archery items were not added as taxable items until 1972. Pistols and revolvers are taxed at 10 percent of value; ammunition and other firearms are taxed at 11 percent of value; and archery items are taxed at 11 percent (except shafts, which are taxed at 39 cents per shaft). The tax is collected at manufacturer or importer level. The allocation of the receipts is regulated by the Pittman-Robertson Act.

The excise tax on fishing gear was established by the Dingell–Johnson Act in 1950. The rate is 10 percent of value and is also collected at manufacturer level. While a specific flat rate excise tax would improve the design, the rates are low enough to avoid interfering with consumer choice.

Combined, the tax base covers everything from arrow shafts to bullets to fish tackles. The revenue from this tax is collected by the federal government, allocated to the Wildlife Restoration Fund and Sportfish Restoration Fund, and apportioned to conservation programs in all 50 states based on land area and hunting and fishing licenses. Recreational boaters also pay into the fund through fuel taxes on motorboats and small engines. By design the tax works as a user fee for hunters and fishers, where purchase of equipment acts as a proxy for the buyer’s consumption of recreational outdoor activities. In addition to the federal tax, states often sell licenses to support wildlife management and conservation.

Because it respects the benefit principle so well, the tax enjoys general support among America’s sporting and outdoor community. The excise tax on hunting and fishing equipment can teach us some lessons about well-designed excise taxes.

While some may consider a well-designed excise tax an oxymoron, excise taxes can be an effective tax tool. A guiding principle is that excise taxes should only be levied when appropriate to capture some externality or to create a “user pays” system—not as a general revenue measure. Due to their narrow base, they are not a sustainable source of revenue for general spending priorities.

Unfortunately, not all excise taxes are well-designed with respect to the benefit principle or principles of sound tax policy. For instance, some states tax car rentals to fund projects like stadium construction and amateur sports. Colorado taxes sports betting to fund water conservation. Philadelphia taxes soda to fund educational programs.

Instead, revenue from excise taxes should be appropriated to relevant spending priorities, as in hunting and fishing examples above. Further, excise taxes should be designed according to the principles of sound tax policies, which means they should have neutral equitable rates, clear definitions, and simple collections.

Excise taxes are generally levied on specific products or services such as alcohol, gasoline, and marijuana. They are often imposed to internalize negative externalities associated with use of certain goods or services, to disincentivize consumption of the taxed good or service, or, as in the example above, as a user fee. An externality, in economics terms, is the side effect or consequence of an activity that is not reflected in the cost of said activity.

An example of a tax internalizing externalities is an excise tax on gambling that funds gambling addiction prevention. Gas taxes are an example of a tax as a user fee, where the purchase of fuel acts as a proxy for road usage—the more gas you purchase, the more you drive on the roads. (They also address externalities by putting a price on drivers’ contributions to traffic congestion and pollution.) Taxes designed to disincentive consumption are often called sin taxes, such as those levied on tobacco, marijuana, and alcohol. Of course, a single excise tax can support more than one of these strategies.

Here are the figures for how excise tax revenue from hunting and fishing gear is apportioned to states to help fund conservation efforts:

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The Tax Foundation is the nation’s leading independent tax policy nonprofit. Since 1937, our principled research, insightful analysis, and engaged experts have informed smarter tax policy at the federal, state, and global levels. For over 80 years, our goal has remained the same: to improve lives through tax policies that lead to greater economic growth and opportunity.